More About:

Government program payments

What about government program payments? Under the 2008 farm bill, a landlord who rents on crop shares must also “materially participate” in the farming operation to qualify for government program payments.

Other requirements also apply. Check with the Farm Service Agency when exploring that option. Moreover, farm program payments are capitalized into the value of farmland, so expect to pay more for that land.

Also, bear in mind that farmland value will vary depending on soil type, fertility, location, topography, history of crop production and other factors. All of these factors need to be carefully considered.

Yes, farmland is hot right now. Demand is high. Institutional investors such as MetLife have jumped into it.

All of this seems lucrative at the moment, but what happens if commodity prices decline precipitously as they did in the 1980s? What happens when institution investors conclude that farmland is no longer as hot an investment? This could be a train wreck in the making.

Commodity Ownership

Commodity ownership as a crop-share rent landlord is not a bad strategy, providing one is aware of historically volatile markets and production risks.

There are no guarantees that prices will go up or stay up or even that a crop will be produced. Bad weather can result in zero crop and significant livestock death, though some of this risk is mitigated through crop insurance.

What about marketing? Be aware that it’s possible to lose a great deal in the futures market — the reason why novices should shy away from futures. Purchasing puts and calls or hedging physically owned commodities are less risky.

Writing options can be disastrous if you don’t know what you’re doing, and even if you do, it’s still considered extremely risky. Some futures investors have experienced financial ruin.

Farming

Farming is risky business. The capital investment to get into farming is huge. A 1,000-acre cotton farm operation may require equipment purchases exceeding a million dollars. This doesn’t include additional purchases for plants, fertilizers, insecticides, herbicides and fuel, to name only a few.

All things considered the costs to operate a 1,000 acre cotton farm may run as high as $2.5 million.

Spiking oil prices have only added to these costs.

After all this, if you’re still interested in farmland as an investment, consider talking to someone who’s farmed for a long time, preferably someone who successfully weathered the farm crisis.

Yes, farming can be a profitable and satisfying lifestyle, but as any experienced farmer will attest, it’s not all peaches and cream.

It’s great — and profitable and satisfying — if you’ve got a crop to sell. If you don’t, well, just remember that the bills won’t stop coming.

(James L. Novak is an Alabama Cooperative Extension System economist and Auburn University professor of agricultural economics.)

Discuss this Article 2

We commend and thank Southeast Farm Press and Professor Novak for presenting an excellent article on agri-business investments.

As has been reported in the press, we have acquired the rights to the Continental Illinois name, and are interested in a number of areas which we feel represent "heartland finance" and the agri-business sector is a sector from which we are interested to receive proposals. We are also interested in proposals and investment inquiries relating to the food processing industries. At this time we are a basic holding corporation, registered in Delaware, not a bank. We have acquired the Continental Illinois trademark and goodwill only, which is all that was left, but we think it can amount to something and, we hope, even surpass the high points in its corporate history.

As Professor Novak has noted, the sector is not without its risks, however agri-business has always been one of America's leading industries, and we feel that should and will continue.

Interested parties are welcome and invited to make contact with us via the website or email as indicated below.

Farmland investments and agriculture investments, specifically the acquisition of farmland as an investment asset carries a different set of risks to traditional assets such as cash, bonds and equities.

I am of the opinion that farmland of good quality with a guaranteed water supply will be one of the most valuable assets on earth in 20 years time as we approach peak population and are no longer able to increase yield or bring on more farmland.

I think to invest in farmland requires a number of unique skillsets that the investor alone does not posses. To invest in farmland successfully the investor should be partnered with local network able to source quality land, and local operatoprs who have a successful track record in local agricultural production.

Also qualified local legal assistance is essential to enasure that the investor remains aware of potential legal risks and financial obligations as a land-owner.

At DGC we marry experienced agricultural operators with investment capital and land assets, using local netwroks to source farmland based on their local knowledge.

Investors are not farmers, farmers are farmers, and each party should do what they do best, investors stump up capital and acquire appreciating, income-genrating assets, local operators can farm the land effectively, enjoying increased economies of scale enabling them to adapt quickly to changes in technology.

Investors also need to be aware of the risks in farming, specifically uncontrollable volatility in yield and prices, and whilst these risks cannot be eliminated, they can be planned for and hedged against.

If an investor chooses an operational asset management model - working the farm through a proxy local operator - they should keep an amount of liquidity to fund inputs in seasons subsequent to a season that produced a poor yield.

Better in most cases to simply lease the land to a local farmer, sacrificing the upside potential but minimising the downside potential too.

This strategy keeps all parties happy, with every party doing what they do best.